The Markets Fall With Fears Of Another Rate Hike In The US

Nervousness reigned in Indian stock markets as selling pressure continued for the second day on Thursday, also the weekly expiry for futures and options. The US Federal Reserve's stance of a tighter policy through 2024 spooked investors all over.

22 Sep 2023 12:00 PM GMT
On today’s episode, financial journalist Govindraj Ethiraj talks to aviation columnist Anjuli Bhargava, Chief Economist at Bank of Baroda Research Madan Sabnavis, as well as well known economics journalist, international trade commentator and columnist Shankkar Aiyar.

Our Top Reports For Today

  • [00:00] Stories Of the Day
  • [01:00] The Sensex falls as Federal Reserve fears of another rate hike in the US weigh.
  • [02:37] India-Canada ties worsen, will trade and business be impacted?
  • [08:24] The Government’s airline regulator suspends Air India’s safety head, what does it mean?
  • [14:02] Why are India’s savings levels falling so dramatically?
  • [22:41] India emerging as future export manufacturing powerhouse with competitive cost structures, new BCG report.

NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.


Markets INDIA

Nervousness reigned in Indian stock markets as selling pressure continued for the second day on Thursday, also the weekly expiry for futures and options. The US Federal Reserve's stance of a tighter policy through 2024 spooked investors all over.

The BSE Sensex was down 571 points to end at 66,230, while the Nifty50 closed at 19,742, down 159 points.

Night before, Federal Reserve officials in the United States voted to hold interest rates steady at a 22-year high but seemed to be split over whether they should raise them once more this year. But most of them leaned towards another increase which spooked everyone of course.

Fed Chair Jerome Powell said that officials didn’t need to decide yet whether to lift rates again after a historically rapid series of increases over the past 18 months and as they await evidence that a recent inflation slowdown can be sustained, reported the Wall Street Journal.

Elsewhere, Chinese stocks hit the lowest levels since November, as an exodus of foreign funds continued amid persistent concerns about the economy.

The MSCI China Index dropped as much as 1.6%, on track for a third consecutive week of losses.

Bloomberg news is reporting the selloff is yet another indication that Beijing’s efforts to restore market confidence are falling flat with investors.

Meanwhile, the British pound fell after the Bank of England also held interest rates steady amid mounting concerns over the economy and signs inflation is receding.


The India Canada Imbroglio

The Indo-Canada diplomatic spat has escalated with India suspending visas for Canadians wanting to visit India and Canada saying it would reduce the number of diplomats in India due to security concerns.

The spat began over the murder of a Sikh activist wanted in India over terror charges but residing in Canada.

Global Affairs Canada said some diplomats have received threats on social media platforms, part of an unfolding backlash in India following Prime Minister Justin Trudeau’s claims on Monday that Indian government agents assassinated a prominent Sikh leader on Canadian soil.

India has called the allegations “absurd” and denied involvement in the June 19 shooting of Hardeep Singh Nijjar, who was pushing for an independent Sikh homeland in India, according to reports in Bloomberg.

“In the light of the current environment where tensions have heightened, we are taking action to ensure the safety of our diplomats,” Global Affairs Canada said in a statement Thursday. “Out of an abundance of caution, we have decided to temporarily adjust staff presence in India.”

To get a sense of the business and trade side of India Canada relations and what could be affected, I reached out to well known economics journalist, international trade commentator and columnist Shankkar Aiyar and began by asking him how we were reading it.


Air India’s Safety Head Suspended

The Directorate General of Civil Aviation (DGCA) on Thursday suspended Air India's chief of flight safety Rajeev Gupta, for a month after finding several lapses during a surveillance carried out in July.

Air India belonged to the Government of India and was acquired fully by the Tata Group in January 2022.

"The DGCA surveillance (conducted on July 25 and 26) found deficiencies in the accident prevention work carried out by the organisation and the availability of the requisite technical manpower as required in the approved flight safety manual and the relevant Civil Aviation Requirements," said the regulator in a statement, according to reports.

"Further, it was observed that some of the internal audit/spot checks claimed to be carried out by the airline were done in a perfunctory manner and not as per the regulatory requirements," the airline regulator said.

After the surveillance, the regulator requested an action taken report from the airline. Once Air India submitted the report, the regulator issued show cause notices to "concerned post holders".

“The approval of the Chief of Flight Safety of Air India has been suspended for a period of one month for the lapses established," said the DGCA.

Air India and Indigo have a combined domestic market share of around 80% in 2023 with IndiGo ferrying around 56% of the country’s passengers and Air India flying 25%.

To get a sense of this suspension, and if it was common, I reached out to Anjuli Bhargava, aviation columnist and Consulting Editor with The Core.


Why Are Household Savings Falling?

Numbers released by the Reserve Bank of India suggest that flow of net household financial savings have dropped to a 50 year low of 5.1% of gross domestic product in 2022-23 as compared to 7.2% in the previous year.

While the reasons could be many for these savings numbers going down, the worry could be what is driving it. For example, could it be that households have suffered income setbacks as the Business Standard newspaper has argued or that the economic recovery has been largely led by corporate profits.

It is also possible, the BS argues that households have not been able to save enough because of sustained high inflation.

Incidentally, financial liabilities for households went up from 3.8% of GDP in 2021-22 to 5.8% in 2022-23. Which of course could be because people bought, for example, more real estate.

Yesterday, we touched upon how sales of several consumer products were falling and in some cases quite sharply over the last year.

Kirana stores are stocking less and distributors are worrying about high inventory levels.

Whether this links or not is not clear, at least to me, but it could unspool in coming days and weeks.

What is clear is that demand is weak at several levels and because people are either constrained from spending or holding off for other reasons.

To get a better sense though I reached out to Madan Sabnavis, Chief Economist at Bank of Baroda Research and began by asking him first, if he could explain to us, what was going on in these data sets ?


Tectonic Shifts in Global Manufacturing

India, Southeast Asia and Mexico are quickly emerging as the future export manufacturing powerhouses with competitive cost structures, deep pools of labour and growing scale and capabilities across diverse industries, says a new report and survey from consulting firm Boston Consulting Group.

This is the outcome of a survey where more than 90% of North American manufacturing executives have said that they have moved some of their production and sourcing to different countries over the past five years and will continue to do so over the next five years.

These shifts are also happening at a time, when US domestic manufacturing is ramping up in response to policy support and rising demand.

The primary driver of these shifts is the ongoing quest for low costs, says BCG but adds that respondents to the survey also indicated a strong desire to shorten lead times, operate in more stable business environments and gain flexibility to respond to disruption, even at the cost of several points of operating margin.

These are of course important points and should be a clear input to policy makers that cost in itself is not the key driver but supply chain efficiency is.

Interestingly, BCG says that a successful transformation of a manufacturing and sourcing footprint tailored towards the end market can improve companies resilience and sustainability and cut global manufacturing and supply chain costs by 20 to 50%.

The last part should of course be music to some ears.

Manufacturing migration is being driven by wage inflation and tight labour markets and productivity of factory workers.

Productivity adjusted labour costs for India rose 18% but it still remains among the worlds most cost competitive sources of manufacturing, alongwith Mexico also the most competitive near shore option for the US.

And data is already reflecting the shifts.

US goods imports from China declined 10% in the last four years (ended 2022) in inflation adjusted terms, they rose by 44% from India.

BCG quotes the example of a high end electronics manufacturer setting up a new factory site in India owing to both geopolitics and supply chain pressures as well as a East Asian automaker and a US toy and game manufacturer also for the same reason.

India has virtually banned imports of toys from China. The move has led to a fair amount of domestic manufacture but, more interestingly, also an increased recognition of local arts and crafts in toy making.

The BCG report does point out that despite rising labour costs China remains competitive thanks to its current workforce availability, extensive supplier base, logistics infrastructure and key role in certain industrial value chains.

India’s logistics infrastructure is unevenly developed, its environmental sustainability can be weak and it has fewer free trade agreements with nations other than members of ASEAN.

On the flip side, India is cost competitive and is just starting to emerge as a major exporter with a broad manufacturing base that supplies everything from electronic vehicles and heavy machinery to chemicals and appliances for its domestic market, says the report.

Updated On: 22 Sep 2023 6:00 AM GMT
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